Individuals seeking bank cards from a financial institution typically fill out applications providing information and requesting a bank card. Financial institutions lend credit to individuals based on the information provided in the applications and their credit history. The financial institution reviews the application provided by the applicant and reviews the applicant's credit history. The goal of the financial institution is to asses the credit risk of each individual bank card applicant so they will not extend credit to an individual that is a poor credit risk.
To assess the credit risk of each individual, the financial institution will develop a score for each applicant based on certain information. The applicant receives points for each item of information analyzed by the financial institution. The amount of points awarded for each item, the items actually analyzed, and the scores necessary for approval vary from financial institution to financial institution.
In today's market, financial institutions are approving more and more bank cards and are experiencing increased competition from other financial institutions for the applicants. Financial institutions would generally grant the applicant a bank card provided the applicant has an acceptable source of income and is not 120 days or more past due with another account.
The decision to approve or deny the applicant's request for a bank card was based on a scoring system. The financial institution scored each bank card applicant based on source and level of income as well as whether the applicant was ever 120 days past due. The scoring system used to evaluate each applicant and the minimum score required for approval was applied uniformly by a financial institution to all its applicants. Each institution had a single scorecard and approval score with which to assess the credit risk of all its bank card applicants. The problem faced by many financial institutions is that a significant number of bank card applicants approved become 90 days past due in the first two years or even declare bankruptcy. The financial institution is faced with the choice of increasing the score required for approval or closely monitoring the approved applicant's use of the bank card. Increasing the score would result in declining a large number of the applicants. This choice would cause a lot of the potential customers to be driven to the financial institution's competitors. Monitoring the approved applicant's use would require an increase in the cost to the financial institution for maintaining the bank card.